ok, I figured it out. I have one default nginx config that catches all vhosts except the one that is running wp with subdomains (multisite enabled). that one has its own config file.
It all works but I had to copy these rewrites from here for the wildcard subdomain: http://codex.wordpress.org/Installing_WPMU#Rewriting_Rules_for_others_HTTP_Server btw they still mention blogs.php I changed it to reflect ms-sites.php and all is well.

Now what makes me frown and ask myself if I am wasting my time here is that actually all static content that should have been handled by nginx seems to fall back to apache2 because of this rewrite. am I right?

so basically nginx works as a front end proxy for all vhosts except this one which actually is the biggest one on the server? have I just wasted 3 days getting this to work?

As previously discussed, the catchall function of this howto needs work..

I came across another howto that provides a more robust method for the nginx conf files.. This one includes failover for all virtual hosts to the apache server, ie it will keep working even if there is no viritual host created in nginx. http://code.google.com/p/scriptz/wiki/NginxAndApache

I don't have a lot of virtual hosts to worry about.. I have implemented these suggested conf files on my server and it is working quite nice. I will continue to tweak and report back..

Couple of adjustments made based on further nginx forum recommendations.

1. Increased the worker processes to 2 and reduced worker connections to 1024. The use of this option is based on number of cpu's available and the need to reduce disk i/o.

2. Added Index index.php index.html index.htm to the http group. This option is global and is passed on. No need to include this elsewhere.

The system went live yesterday with 7 sites functioning. Immediate improvement over the previous system was noticed. The images are all loading extremely fast and the server load is very low, typically .15.

As mentioned before, this installation is based on the Nginx Catchall for Ispconfig 3. I have removed the kludgy www redirect since it did not work very well. The new failover feature improves the functionality. I had forgotten to create an nginx virtual host conf file for one of my sites and noticed the impact on the apache connections. After creating the vhost conf, apache dropped to half the connections..

One last word, READ the WIKI. The nginx site has a pretty good wiki describing many of the features uses for this proxy.

Thanks, Someone posted it on a tutorial and I'm trying to figure out where for starters he found it and where he put it.
He's saying it gives amazing results, would love to hear from someone where I could place it in my configuration. Cuz atm it's working as intended, all my websites are functional with ispconfig etc and the headers are telling me the website is provided by Nginx so that's all happy and good.

But would really appreciate it if someone could tell me where to put that line of code, or even if it's that necessary

I also found that there is one flaw in this whole idea, and that is when things like roundcube squirrelmail or even phpmyadmin are hosted outside of /var/www/* things like css etc that are managed by Nginx result in a 404 error.

Thus resulting improper function of these services, could someone help me find a fix cuz I can't find one.